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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures. Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions. Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

A Day in the Life of John Davidson, Part VI

My apologies to readers for not completing this six weeks ago. It’s not as if I did not know where I wanted to go, it was that things in my life and other aspects of the news led me to cover other things. Here are the episodes so far:

I hope to complete this in 1-3 more episodes. For those that want a program, here are the main characters, and I don’t think that I am introducing any more. By the way, when I am done, I will publish this whole story as one long post.

Cast of Characters, in order of appearance

John Davidson — Protagonist, CEO of Wonderful Life

Peter Farell, — Chief Investment Officer for Mega Insurance, the holding company for all of the operating subsidiaries.

“Cash flow is the blood flowing through the circulatory system for businesses,” said Caleb Matmo. “This is true of any sort of company, but with a financial company, the answer is tricky, because one has to take into account the change in capital required to support the business. Also, with insurers, we try to equalize reserving, so that conservatism or liberalism gets stripped out. This applies to both assets and liabilities.”

John thought about it. “Hmm — I always said to my Chief Actuary, Greg, ‘No negative surprises. We must not over-report earnings.’ Let’s see what happens next.”

Matmo continued, “Working with your actuarial staffs and with Peter, we have constructed a new accounting basis that reflects your ability to dividend to Mega.”

“Uh, oh,” thought John.

“But in the process, we have reflected standardized procedures for reserving, and capital levels as well. Where the regulatory capital basis is too lenient we raised the level of capital necessary to support the business. Companies should not dividend back funds necessary to support the business, even if the regulators might let them do it. Think of the recent demise of your financial guarantee insurer as an example. They sent ample dividends to the holding company, and all the while their business was deteriorating.”

Stan Bullard said, “Mr. Matmo? It’s time for a break. After we come back, summarize your comments regarding each insurance subsidiary, and then Brad and I will take it from there, with your help.”

“Of course, Mr. Bullard.” said Caleb Matmo.

John got up and stretched. He was bewildered at the turn of events, but he picked up the reports and headed to the Mens room. “Time for analysis, but I need relief,” he thought. The room went many different directions, but John ignored it.

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About David Merkel

David J. Merkel, CFA, FSA, is a leading commentator at the excellent investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited David to write for the site, and write he does — on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, and more. His specialty is looking at the interlinkages in the markets in order to understand individual markets better.
David is also presently a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. He also manages the internal profit sharing and charitable endowment monies of the firm.
Prior to joining Hovde in 2003, Merkel managed corporate bonds for Dwight Asset Management. In 1998, he joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.
His background as a life actuary has given David a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that David will deal with in this blog.
Merkel holds bachelor’s and master’s degrees from Johns Hopkins University. In his spare time, he takes care of his eight children with his wonderful wife Ruth. View all posts by David Merkel →